Canada’s labour market saw significant growth in January, adding 76,000 jobs and bringing the unemployment rate down to 6.6%, according to the latest data from Statistics Canada. The unexpected surge in employment has sparked speculation that the Bank of Canada may hold off on an anticipated interest rate cut next month.
The unemployment rate dipped by 0.1 percentage points, marking the second consecutive monthly decline after peaking at 6.9% in November. Economists polled by Reuters had projected a much lower increase in jobs and expected the unemployment rate to rise slightly instead.
Stronger Than Expected Job Market
The robust job market performance has surprised analysts. Derek Holt, vice-president and head of capital markets economics at Scotiabank, described the momentum as “incredibly strong,” suggesting the Bank of Canada will face a high threshold before considering another rate cut in the near future.
One possible factor influencing the hiring boom is uncertainty surrounding U.S. trade policies. Holt speculated that trade tensions with the U.S., fueled by President Donald Trump’s aggressive rhetoric, may have led Canadian businesses to hire more workers to meet production demands.
Manufacturing Sector Leads Employment Gains
The manufacturing sector experienced the most significant employment boost, adding 33,000 jobs—one-third of them in Ontario alone. Statistics Canada reported that nearly 40% of Canada’s 1.9 million manufacturing jobs are tied to U.S. demand for exports. In the automotive industry, that dependency is even higher, with 70% of jobs linked to American markets.
The job growth comes amid heightened economic tensions between Canada and the U.S., with Trump threatening a 25% tariff on all Canadian imports. Canada has vowed to retaliate if the tariffs are imposed. However, Trump announced a temporary pause on his tariff plan earlier this week after securing commitments from Canada, including designating cartels as terrorist entities and appointing a “fentanyl czar” to manage cross-border drug issues.
Public Sector Job Losses & Wage Growth Trends
While private sector employment grew, the public sector recorded a loss of 8,400 jobs in January. Wage growth also continued to slow, with hourly wages rising by 3.5% year-over-year—down from 4% in December and marking the slowest pace since April 2022.
Interest Rate Outlook & Economic Projections
The Bank of Canada had previously indicated that any future interest rate cuts would depend on continued economic softness. However, with January’s strong employment numbers, analysts believe a rate cut in March is now less likely.
Nathan Janzen, assistant chief economist at RBC, noted that the firmer labour market data increases the chances that the central bank will slow the pace of rate cuts. Similarly, Andrew Grantham, senior economist at CIBC Capital Markets, acknowledged the positive job report but maintained that lower interest rates would still be necessary to fully address economic slack.
The Bank of Canada will review additional economic data, including another jobs report and inflation figures, before making a decision at its March 12 meeting. December’s inflation rate stood at 1.8%, and the next inflation report for January is set to be released on Feb. 18.
Royce Mendes, head of macro strategy at Desjardins, suggested that if no new tariffs are imposed before March, the central bank may hold rates steady. He also pointed out that the strong labour market and stable inflation have given policymakers flexibility to respond to potential economic shocks.
The Canadian dollar has strengthened in response to the strong job numbers, and government bond yields have risen as investors adjust expectations for interest rate decisions.
